Budget Review 2017–18 Index

Phillip Hawkins, Patrick Nykiel

This brief provides an overview of the key fiscal and economic numbers from the 2017–18 Budget.

The 2017–18 Budget reaffirms a plan by the Australian Government to return the Budget to balance in the 2020–21 fiscal year and remain in surplus over the medium term.[1]  

Achieving this surplus depends on closing the gap between payments and receipts. The Budget papers show that this will predominately be achieved by increasing receipts (Fig 2). Over the next four years, total Government receipts are forecast to grow by around 6.7 per cent per annum from 23.8 per cent of GDP in 2017–18 to 25.5 per cent of GDP in 2020–21. New measures announced in this Budget are expected to add around $23.0 billion to revenue over this period.

Over the same period, total payments are expected to grow at around 4.2 per cent per annum (in nominal terms), declining slightly from 25.2 per cent of GDP in 2017–18 to 25 per cent of GDP in 2020‑21. New measures announced in this Budget are expected to add $17.4 billion to expenses over the five years to 2020–21.

Most of the revenue increases in the budget are related to personal income taxes,[2] which make up just under half of all government receipts. These are expected to grow to their highest level as a share of GDP since 1999–2000 (Fig 4). The growth in personal income tax is being driven predominately by an increase in the Medicare Levy (which is estimated to add $8.2 billion to tax revenues over the next four years) and strong wages growth.[3]

Company tax receipts[4] are also forecast to grow strongly over the next four years, to their highest level since 2008–09, on the back of improved corporate profitability and higher than previously forecast commodity prices (Fig 5).[5]

In contrast, sales taxes,[6] excise and customs duties are not expected to change significantly over the next four years, remaining around their lowest share of GDP since the GST was introduced in 2000 (Fig 6). As a result, indirect taxes are expected to fall to their lowest share of total revenue since the GST was introduced (Fig 7).

Underlying these improved revenue forecasts are improvements in a number of key macroeconomic parameters. By 2020–21, wages growth is forecast to increase to its highest annual growth rate since 2010–11 (Fig 14) and unemployment is expected to fall to its lowest level since 2011–12. Real GDP growth is expected to improve from 1.75 per cent in 2016–17 to 3 per cent from 2018–19, around its 20 year average.

A number of commentators have highlighted uncertainties in these economic forecasts, and the Budget itself notes the sensitivity of taxation receipts to these underlying parameters. For a more detailed discussion of this see the Budget briefing paper Assessment of key economic parameters.

The Budget papers also reference a number of international economic risks that could have potential impacts on the Budget’s economic forecasts, many of which the Parliamentary Library highlighted in its Pre-Budget Snapshot of the Australian Economy.[7]

The headline fiscal numbers

• the underlying cash deficit is estimated to be $29.4 billion (-1.6 per cent of gross domestic product (GDP)) in 2017–18 and $21.4 billion (-1.1 per cent of GDP) in 2018–19 before improving to a projected underlying cash surplus of $7.4 billion (0.4 per cent of GDP) in 2020–21
• over the four years to 2020–21 accumulated net deficits are estimated to total $45.9 billion
• total general government sector receipts are estimated to be $433.5 billion (23.8 per cent of GDP) in 2017–18, $462.5 billion (24.4 per cent of GDP) in 2018–19 rising to a projected $526.3 billion (25.4 per cent of GDP) by 2020–21
• tax receipts are estimated to be $404.3 billion (22.2 per cent of GDP) in 2017–18, $430.7 billion (22.8 per cent of GDP) in 2018–19 increasing to a projected $492.5 billion (23.7 per cent of GDP) by 2020–21
  • The largest component of tax receipts is personal income taxes which are estimated to be $217.4 billion (11.9 per cent of GDP) in 2017–18, $230.8 billion (12.2 per cent of GDP) in 2018–19 increasing to a projected $270.2 billion (13 per cent of GDP) in 2020–21.
• general government sector payments are estimated to be $459.7 billion (25.2 per cent of GDP) in 2017–18, $480.4 billion (25.4 per cent of GDP) in 2018–19 and increasing to a projected $518.9 billion (25.0 per cent of GDP) by 2020–21
• general government sector net debt is estimated to be $354.9 billion (19.5 per cent of GDP) in 2017–18, $375.1 billion (19.8 per cent of GDP) in 2018–19 declining to a projected $366.2 billion (17.6 per cent of GDP) by 2019–20
• general government sector net interest payments are estimated to be $13.4 billion (0.7 per cent of GDP) in 2017–18, $13.7 billion (0.7 per cent of GDP) in 2018–19 increasing to a projected $15.5 billion (0.7 per cent of GDP) in 2020–21
• the face value of Commonwealth Government Securities (CGS) on issue is estimated to be $540.0 billion in 2017–18, $582.0 billion in 2018–19 rising to $606.0 billion in 2020–21. Looking further out the total value of CGS on issue is projected to rise to $725.0 billion by 2027–28.

The Budget deficit is forecast to gradually improve from a $29.4 billion deficit in 2017–18 to a $7.4 billion surplus in 2019–20. Underlying Cash Balance Year $m % GDP 2015–16 -39,606 -2.4 2016–17 -37,600 -2.1 2017–18 -29,396 -1.6 2018–19 -21,422 -1.1 2019–20 -2,470 -0.1 2020–21 7,417 0.4	Figure 1: Underlying Cash Balance % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, Statement 11: historical Australian government data, Table 1, p. 11-6.
Achieving a surplus depends on closing the gap between payments and receipts... in the last decade payments peaked at 26.0 per cent of GDP in 2009–10 and are estimated to be 25.5 per cent of GDP in 2018–19 before declining to 25.0 per cent in 2020–21 in the last decade receipts bottomed at 21.4 per cent of GDP in 2010–11 and are forecast to be 23.8 per cent of GDP in 2017–18 and increase to 25.4 per cent of GDP in 2020–21.	Figure 2: Receipts and Payments % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, 2017, Statement 11: historical Australian government data, Table 1, p. 11-6.
Net debt is forecast to peak as a percentage of GDP (19.8 per cent) in 2018–19. Net Debt Year $m % GDP 2015–16 305,454 18.5 2016–17 325,091 18.6 2017–18 354,931 19.5 2018–19 375,112 19.8 2019–20 374,715 18.9 2020-21 366,169 17.6	Figure 3: Net Debt % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, 2017, Statement 11: historical Australian government data, Table 4, p. 11-12.
Total personal income tax receipts are projected to grow to 12.2 per cent of GDP in 2020–21, their highest level since 2000 Individuals and other tax receipts Year $m % GDP 2015–16  198,303 12.0 2016–17  205,990 11.7 2017–18  217,400 11.9 2018–19  230,790 12.2 2019–20  250,840 12.6 2020–21  270,200 13.0	Figure 4: Personal income tax % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, Statement 5: revenue, online supplementary tables.
Company income taxes are projected to grow to 4.6 per cent of GDP in 2020–21,around their highest level since 2008–09 Company tax receipts Year $m % GDP 2015–16  63,638 3.8 2016–17  68,800 4.0 2017–18  78,800 4.4 2018–19  85,600 4.6 2019–20  92,600 4.7 2020–21  96,000 4.6	Figure 5: Company Tax % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, 2017, Statement 5: revenue, online supplementary tables.
Sales tax (including GST), excise and customs duties are projected to be 5.6 per cent in 2020–21, close to their lowest level since 2000 Sales tax, excise and customs duty Year $m % GDP 2015–16  94,337 5.7 2016–17  96,584 5.5 2017–18  100,978 5.5 2018–19  106,301 5.7 2019–20  111,355 5.6 2020–21  117,643 5.6	Figure 6: Sales (incl GST), Excise and Customs Taxes % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, 2017, Statement 5: revenue, online supplementary tables.
Indirect taxes are projected to fall to their lowest proportion of total receipts since 1999-2000, before the GST was introduced Direct taxes are taxes on income or profits, Indirect taxes are taxes on goods and services One of the Government’s reasons for reform at the time the GST was introduced was ‘the Commonwealth will become increasingly reliant on income directly levied on individuals... tax rates would rise and the system become even more unfair as those individuals who had the opportunity to avoid tax increasingly did so. The indirect tax base would continue to decline [and] rates would need to be increased again’ [8]’	Figure 7: Direct and Indirect Taxes (% of total receipts) Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, 2017, Statement 5: revenue, online supplementary tables.
Effect on the Underlying Cash Balance of changes since MYEFO Year Policy measures $m Parameter variations $m 2016–17 -1,429 343 2017–18 -2,299 1,599 2018–19 -1,303 -407 2019–20 3,128 4,394 2020–21 6,724 -390	Figure 8: Effect of policy and parameter changes on the Underlying Cash Balance since MYEFO Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, Statement 3: overview, Table 6, p. 3-27.
Where does government spending go in 2017–18? Estimates of Expenses by function   $b % Social security & welfare 164.1 35.3 Health 75.3 16.2 Education 33.8 7.3 Defence 30.1 6.5 General public services 20.7 4.5 All other functions 47.6 10.2 Other purposes 92.8 20.0 Total 464.3 100.0	Figure 9: Expenses by function in 2017–18 Source: Australian Government, Budget 2017–18, Budget overview, 9 May 2017, Appendix B, p. 25.
Where does the revenue come from in 2017–18?   $b % Individuals income tax 209.6 47.2 Company & resource rent taxes 80.4 18.1 Sales tax (incl. the GST) 67.3 15.1 Fuels excise 18.7 4.2 Other taxes 39.4 8.9 Non-tax revenue 29.0 6.5 Total 444.4 100	Figure 10: Revenue in 2017–18 Source: Australian Government, Budget 2017–18, Budget overview, 9 May 2017, Appendix B, p. 25.

 

The headline economic forecasts

Table 1: Treasury forecasts of major economic parameters (per cent)

	2015–16	2016–17	2017–18	2018–19	2019–20	2020–21
Real GDP	2.6	1.75	2.75	3	3	3
Employment	1.9	1	1.5	1.5	1.5	1.5
Unemployment Rate	5.7	5.75	5.75	5.5	5.5	5.25
Consumer Price Index	1	2	2	2.25	2.5	2.5
Wage Price Index	2.1	2	2.5	3	3.5	3.75
Nominal GDP	2.3	6	4	4	4.5	4.75
Terms of Trade	-10.2	16.5	-2.75	-4.25

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, Statement 1: Budget overview, Table 2, p. 1-9;
Statement 2: economic outlook, Table 1, p. 2-6.
The Budget only forecasts Terms of Trade to 2018-19.

Table A1 provides a snapshot of how these forecasts have changed since last year’s budget (see Attachment A).

Economic growth is forecast to improve Annual real GDP growth is expected to fall to 1.75 per cent in 2016-17 to due to events related to Tropical Cyclone Debbie It is expected to increase to 3 per cent in 2018‑19 and remain at the level, around its 20 year average, to 2020-21.	Figure 11: Real GDP Growth % Source: Australian Bureau of Statistics (ABS), Australian national accounts: national income, expenditure and product, December 2016, cat. no. 5206.0, ABS, Canberra, March 2017.
The Unemployment rate is expected to fall to 5.25 per cent in 2020-21, around its lowest level since 2011-12	Figure 12: Unemployment and Participation % of Labour Force Source: ABS, Labour force, Australia, March 2017, cat. no. 6202.0, ABS, Canberra, April 2017.
In recent years large falls in commodity prices have driven a significant decline in Australia’s terms of trade. A near-term boost in commodity prices is expected to improve the terms of trade in 2016-17, before declining slightly in 2017-18 and 2018-19.	Figure 13: Terms of Trade Index Source: Australian Bureau of Statistics (ABS), Australian national accounts: national income, expenditure and product, December 2016, cat. no. 5206.0, ABS, Canberra, March 2017.
Wage price growth has been weak in recent times The wage price index (WPI) is calculated by comparing the cost of wages over time for the same work level and output Annual forecast wage growth in 2016-17 is forecast to be 2 per cent, the lowest rate of growth since the start of the series in 1998. Wage growth is expected to be 3.75 per cent in 2020-21 its highest level since 2010-11.	Figure 14: Wage Price Index Growth Source: Reserve Bank of Australia (RBA), Statistical tables, H4 – Labour Costs and Productivity.

Attachment A

Table A1: Treasury forecasts of major economic parameters (per cent)

	2015–16	2016–17	2017–18	2018–19	2019–20	2020–21
Real GDP
Budget 2016–17	2.2	2.5	2.5	3	3	3
PEFO 2016	2.2	2.5	2.5	3	3	3
MYEFO 2016–17	2.7	2	2.75	3	3
Budget 2017–18	2.6	1.75	2.75	3	3	3
Employment
Budget 2016–17	1.6	2	1.75	1.75	1.25	1.5
PEFO 2016	1.5	2	1.75	1.75	1.25	1.5
MYEFO 2016–17	1.9	1.25	1.5	1.5	1.5	1.5
Budget 2017–18	1.9	1	1.5	1.5	1.5	1.5
Unemployment Rate
Budget 2016–17	6.1	5.75	5.5	5.5	5.5	5.5
PEFO 2016	6.1	5.75	5.5	5.5	5.5	5.5
MYEFO 2016–17	5.7	5.5	5.5	5.25	5.25
Budget 2017–18	5.7	5.75	5.75	5.5	5.5	5.25
Consumer Price Index
Budget 2016–17	1.5	1.25	2	2.25	2.5	2.5
PEFO 2016	1.5	1.25	2	2.25	2.5	2.5
MYEFO 2016–17	1	1.75	2	2.5	2.5
Budget 2017–18	1	2	2	2.25	2.5	2.5
Wage Price Index
Budget 2016–17	2.3	2.25	2.5	2.75	3.25	3.5
PEFO 2016	2.3	2.25	2.5	2.75	3.25	3.5
MYEFO 2016–17	2.1	2.25	2.5	3.25	3.5
Budget 2017–18	2.1	2	2.5	3	3.5	3.75
Nominal GDP
Budget 2016–17	1.6	2.5	4.25	5	5	5
PEFO 2016	1.6	2.5	4.25	5	5	5
MYEFO 2016–17	2.3	5.75	3.75	4.25	4.5
Budget 2017–18	2.3	6	4	4	4.5	4.75
Terms of Trade
Budget 2016–17	-10.3	-8.75	1.25	0
PEFO 2016		1.25	0
MYEFO 2016–17	-10.2	14	-3.75
Budget 2017–18	-10.2	16.5	-2.75	-4.25

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2016–17, Statement 1, Table 2, p. 1-8, Statement 2, Table 1, p. 2-6; S Morrison (Treasurer) and M Cormann (Minister for Finance), Pre-election economic and fiscal outlook 2016, Table 2, May 2016, p. 16; Australian Government, Mid-year economic and fiscal outlook 2016–17, Table 1.2, p. 2, Table 2.2, May 2016, p. 11; Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, 2017, Statement 1, Table 2, p. 1-9, Statement 2, Table 1, p. 2-6.

 

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[1].          S Morrison (Treasurer), Budget speech 2017–18.

[2].          This refers to income and other withholding taxes, plus FBT and superannuation taxes.

[3].          T Clark , A Lukin and D Wood, ‘Treasurer Scott Morrison’s 2017-18 budget speech, annotated by experts’, The Conversation, 10 May 2017.

[4].          This refers to company income tax plus resource rent taxes

[5].          Australian Government, Budget strategy and outlook: budget paper no. 1: 2017–18, Statement 5: revenue, p. 5-13.

[6].          This includes the Goods and Services Tax (GST), Wine Equalisation Tax (WET) and Luxury Car Tax.

[7].          N Gupta, P Hawkins and H Portillo-Castro, Pre-budget snapshot of the Australian economy: a quick guide, Research paper series, 2016–17, Parliamentary Library, Canberra, 9 May 2017.

[8].          P Costello (Treasurer), Tax Reform not a new tax a new tax system – The Howard Government’s plan for a New Tax System - Overview, report, August 1998

 

All online articles accessed May 2017. 

For copyright reasons some linked items are only available to members of Parliament.

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